Burton Malkiel: Expect Sub-Par Returns on Stocks for Long Term

Friday, 29 Aug 2014 08:18 AM

By Dan Weil

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Low interest rates may justify stock prices at current levels, but high valuations indicate stocks will underperform historical averages in the long term, says Burton Malkiel, author of the famous investing tome "A Random Walk Down Wall Street."

The cyclically adjusted price-earnings (CAPE) ratio, which includes 10 years of earnings, stands at 26.3. That trails only the market peaks of 1929, 2000 and 2007.

The CAPE ratio does reasonably well in predicting 10-year stock-market returns, Malkiel writes in The Wall Street Journal.

Editor’s Note:
New Warning - Stocks on Verge of Major Collapse

"High CAPEs predict low future returns. Low CAPEs are often followed by generous stock-market returns. The CAPE is not useful in predicting returns one or two years into the future," he explains.

"Long-run equity returns from today's price levels are likely to be considerably lower than their 10 percent long-run average."

How should investors respond?

"If you have established your retirement savings plan assuming double-digit returns, it is time to recalibrate and save more," Malkiel says.

But don't try to time the market, he warns. That's been proven to be a losing proposition over time.

"Within equity and fixed-income markets, look for opportunities that seem relatively well-priced and ensure that they have a place in your portfolio," Malkiel writes.

Meanwhile, Societe Generale equity strategist Albert Edwards predicts stocks will fall, as corporate buybacks dry up.

Those buybacks have played a major role in the market's rise, as the Federal Reserve's low-rate policy has enabled corporations to issue debt cheaply and then use the proceeds to snap up their own shares.

But, "the share buyback party is over," Edwards writes in a commentary obtained by Moneynews. That's because corporate debt issuance will become more difficult.

S&P 500 companies bought back $120 billion of shares in the second quarter, down from $159 billion in the first quarter, according to preliminary data from S&P Dow Jones Indices.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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